Education and ESOP Creation

Performance Validation’s Journey

By Richard Van Doel, Ph.D, President, Performance Validation

On January, 2, 2018, Performance Validation (PV), a leading bio-technical, pharmaceutical and medical device industry contractor, became Indiana’s newest Employee Stock Ownership Plan (ESOP) company. As the president of this company, I’d like to share how our experience in educating employees about employee ownership — even before the transition to an ESOP — may offer insights on creating the culture that past experience has shown is the key to unlocking the power of employee ownership.

We also wanted to keep local jobs local and to reward the employees who helped grow the company with an opportunity to share in the wealth they have helped to create.

Like most private companies, our motivation to transition to an employee-owned company was the result of business succession planning coupled with a strong desire to keep the company independent. We also wanted to keep local jobs local and to reward the employees who helped grow the company with an opportunity to share in the wealth they have helped to create. However, unlike most private companies where a decision to become an ESOP is made by a single (or small group) of owners with limited employee-education before the announcement, we became 100 percent employee-owned with a different tack.

It all started in 2011–2012, when the company was re-purchasing equity from our founder. We planned to buy him out, and at the same time expand employee ownership through a deliberate partnership. We offered our partners additional equity through participation in a “management by objectives plan.” While this met PV’s objectives in the short term, it became apparent that simply repeating this process as other senior managers sought to sell their shares was not a long-term solution. There had to be a better way. One focused on all those who make the company function and succeed.

Performance Validation used a local valuation company, GBQ, to value our stock on an annual basis. In 2012, I met with our valuation representative, who was well-versed in helping companies establish ESOPs. He spent several hours with us explaining how the tax-advantaged ESOP structure could be used as a business succession strategy and provide owner liquidity. He also invited us to attend The ESOP Association (TEA), Indiana chapter meeting in Indianapolis in March, where we met many members from ESOP companies. Later that year, PV joined The ESOP Association, and I took advantage of the educational and network opportunities provided by the chapter meetings.

[I]t was clear that company culture, specifically employee-ownership culture, is a significant influencer on ESOP performance.

Our desire to establish an ESOP as a business exit strategy was shared with PV’s Board of Managers in 2013, and we planned to have an ESOP established by 2020. Based on our experience at ESOP Association Indiana chapter meetings and research on ESOPs, it was clear that company culture, specifically employee-ownership culture, is a significant influencer on ESOP performance. PV had a good understanding of our existing and desired company culture. We assessed our progress using Cameron and Quinn’s Organizational Culture Assessment Instrument. To ensure we were addressing the cultural fit element, in 2014, we expanded attendance at the ESOP chapter and state meetings to include our human resources manager and our vice president. Our vice president attended our first ESOP annual conference in Washington, D.C.

Additionally, I was named a 2014–2015 Kelso Fellow at Rutgers School of Management and Labor relations for my research: Exploring Stewardship Characteristics in Professional, Scientific, and Technical Services Employee-Owned Companies. By mid-2014, through participation at state and national ESOP conferences, and academic research, PV’s senior leaders had become very knowledgeable about ESOPs. Now it was time to expand this knowledge to all of PV’s owners.

At a meeting in late 2014, senior leadership met with several of the existing owners of the company to share our intent to become an ESOP in 2018. As part of the initial owner education, we shared why establishing an ESOP was, in our opinion, the best decision for the company. We talked about ESOP fundamentals (how it is established and how it works), ESOP Governance (plan and communications committee, external board members and the trustee), and how employees can get their money (when they terminate or retire).

To provide continuing education for our owners, beyond a few hours of PowerPoint, we established a formal employee-owner “Learning Track in our Learning Management System.” This training occurred over a one-year period (2014–2015) and incorporated live and recorded webinars from the National Center of Employee Ownership (NCEO) on a variety of ESOP topics.

This was a great way to connect the dots between owner actions and company outcomes in a safe, supportive environment.

Additionally, it was required that each of our existing owners attend at least one ESOP Association chapter meeting, which would provide an opportunity for our owners to meet with, interact, and to be exposed to employee-ownership from other companies without external pressure from PV’s senior leaders. This training culminated with a two-day on-site training session in October 2015, where once again we covered our internal ESOP training as a refresher and introduced the owners to the Employee Ownership Game with Cathy Ivancic of Workplace Development. This was a great way to connect the dots between owner actions and company outcomes in a safe, supportive environment.

Education continued in 2016 as PV’s owners continued to attend ESOP educational conferences at the state and national level, and in early 2017 PV once again held a meeting with PV’s owners to review the results of the Feasibility Study performed by the Beyster Institute. We also reviewed ESOP training for our members. In June, 2017 PV held an all-hands meeting where we shared that the company will be established as an ESOP by 2018.

[I]t is an exciting time to be a part of the PV family.

This was followed by an all-employee training conducted as live, teleconference, and recorded webinars throughout the summer. These included ESOP topics like: “ESOP 101: What is it and how does it work?,” “ESOP 201: Governance and ESOP Committees,” and “ESOP 301: Evolution of the OCAI to the ESOP Communication committee.” In October, 2017, the nucleus of PV’s communications committee, consisting of four future employee-owners, attended the Third Annual Great Lakes Regional ESOP conference in Sandusky, Ohio. After the conference, they provided a summary of their experience for our company newsletter; one key paragraph that I want to share follows,

“We learned how successful employee-owned companies run their communications committees, interview processes and company events and feel that the ESOP community can be a helpful resource. The excitement of being involved in part of an employee-owned company was evident throughout the entire event and by all of its participants. PV’s focus on culture, transparency and education of its employees has primed the company to become a successful employee-owned company. Other attendees were surprised and impressed when we told them that we were not an ESOP yet, but we were attending the conference. They admired the fact that PV was starting the ESOP education process prior to creating the ESOP, rather than after. Although there is a great deal more to learn about becoming a successful ESOP, we walked away from the conference feeling that PV is headed in an exciting new direction. The development of our ESOP puts us in the unique minority of American companies that are 100 percent employee owned. This is an exciting time to be a part of the PV family!”

PV’s journey to a 100 percent employee-owned company is somewhat unique, given the attention we have afforded to education for current and future owners pre-transaction. I chose to follow this path in part based on comments from other ESOP companies who neglected to provide ESOP education pre-transaction, and later struggled post-transaction as employees and managers attempted to define their new roles as employee-owners. The question we now need to answer, going forward, is to what degree pre-transaction training contributes to our ESOP’s success. For now I would agree with the sentiment of our future employee-owners: it is an exciting time to be a part of the PV family. Because our employee-owners have worked to create PV’s successes, investing in them and their hard work is not only equitable and fair, I believe it will be the key to our future continued success.

Richard Van Doel, Ph.D., is President and Chief Financial Officer of Performance Validation Inc., as well as President of the Indiana Center for Employee Ownership.